Section 1

CONTENTS

The Nature Of Economics................................................................................................................2

What is Economics?......................................................................................................................2
What Is Meant By The Term Economy?.......................................................................................2
What Is The Economic Problem? Scarcity&Choice......................................................................2
What Are The Main Sectors In An Economy?..............................................................................3
What is Opportunity & Money Cost?...........................................................................................4
Production Possibility Frontier (PPF)............................................................................................6
Infulences On Ecomonic Descision Individual & Firm................................................................12

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THE NATURE OF ECONOMICS

WHAT IS ECONOMICS?

Economics is a social science that deals with the production, consumption, distribution and
protection of goods and services to satisfy the unlimited wants and needs of an individual and a
society.

As stated in the definition, individuals are involved in the economy. Like all things, our choices
and our actions are influenced by certain situations and certain factors.

For example, an individual’s choice is influenced by their sex drive, family and their income.
These are just a few things that influence an individual choice.

WHAT IS MEANT BY THE TERM ECONOMY?

An economy is a system of organizations and institutions that facilitate or play in part in the
production and distribution of goods and services in a society.

In Economies, there are economic systems. These systems are essentially a network of
organizations that are designed to help solve the Economic Problem

These economic systems comprise of the individual/households, firms and businesses and the
government.

WHAT IS THE ECONOMIC PROBLEM? SCARCITY&CHOICE

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Simply put, the economic problem is scarcity. There are not enough resources to satisfy a
societies’ unlimited wants and needs.

Scarcity and choice can be related. They are related due to the fact that scarcity is a
consequence of a person’s choice. With Scarcity, people have to choose how best to allocate
their resources. Usually, people have to allocate their resources in a manner where it satisfies
their needs and any additional wants as possible.

In relation to an economy, scarcity is the limited resources to the unlimited wants and needs of
an individual and society. Scarcity is caused through the demand of resources being accelerated
faster than the means of production.

As stated before, when scarcity is involved, people have to make choices with their resources.
This is done so that the resources satisfy their needs and as many possible wants as possible.

In Economics, there is a term called utility and it is measured in utils. Utility in economics is the
satisfaction derived or expected to be derived from the consumption of goods and services.
With Scarcity involved people have to make a choice and it is usually for the greatest utility.
Utilis are essentially units that measure satisfaction.

WHAT ARE THE MAIN SECTORS IN AN ECONOMY?

In a standard economy, there are usually 3 sectors. The 3 sectors in an economy are as follows:

 Primary sector
 Secondary sector
 Tertiary sector

The Primary Sector in an economy deals with the extraction of raw materials from the Earth.

The Secondary Sector in an economy deals with the manufacturing of goods and services using
the raw materials obtained.

The Tertiary sector in an economy deals with the services provided by individuals.

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WHAT IS OPPORTUNITY & MONEY COST?

In Economics, Opportunity Cost is the next best alternative given up.

In Economics, Money Cost is the cost of an item expressed in terms of money.

There are 4 types of Opportunity Cost and each can be represented on a graph.

1. Zero Opportunity Cost

2. Increasing Opportunity Cost
3. Decreasing Opportunity Cost
4. Constant Opportunity Cost

Each Opportunity Cost will be examined and graphed in the following pages.

Zero Opportunity Cost -> This indicates that the resources needed to produce two goods are
unrelated. Since they are unrelated, this means that an increase in the production of Good 1
will not affect the production of Good 2

The Table below is a representation of zero opportunity cost.

Good 1 Good 2
1 4
2 4
3 4

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Increasing Opportunity Cost -> Increasing Opportunity Cost means as the production of one
Good increases, the opportunity cost of Good 2 increases.

The Table below is a representation of Increasing Opportunity Cost

Good 1 Good 2
2 1
3 2
4 7

Decreasing Opportunity Cost -> As the production of one Good increases, the opportunity cost
of Good 2 decreases.

The Table below is a representation of Decreasing Opportunity Cost.

Good 1 Good 2
1 10
2 7
3 4

Constant Opportunity Cost -> The opportunity costs of Good 2 stays the same as production of
one Good increases. Essentially, as more of one good is produce, more of another good is
produced in the same proportion.

The Table below is a representation of Constant Opportunity Cost.

Good 1 Good 2
3 6
4 8
6 12

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PRODUCTION POSSIBILITY FRONTIER (PPF)

As stated before, each opportunity cost can be represented on a graph. That graph is called the
Production Possibility Frontier

In Economics, the Production Possibility Frontier is a curve that illustrates the variations in the
amounts that can be produced of two products IF both depend on the same finite resources for
their manufacture.

Opportunity Cost represented on the Production Possibility Frontier.

The points A, B, C, X &Y are all shown on this graph.

Points A, B & C are all located on the graph. These points are said to be efficient. They are said
to be efficient because they utilize the resources in the best way possible.

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The Point X represents an inefficient point. The resources are not being utilized properly to
create X. The point is attainable but it is inefficient.

The Point Y is simply unattainable for the economy. It is unattainable because the economy may
not have the resources necessary to attain point Y.

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Increasing Opportunity Cost represented on the Production Possibility Frontier.

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Decreasing Opportunity Cost represented on the Production Possibility Frontier.

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Zero Opportunity Cost represented on the Production Possibility Frontier

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Constant Opportunity Cost represented on the Production Possibility Frontier

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INFULENCES ON ECOMONIC DESCISION INDIVIDUAL & FIRM

The main influences on individuals when making economic decisions are past experiences, a
variety of cognitive biases, an escalation of commitment, sex drive, income, age and
socioeconomic status.

The main influences on firms when making economic decisions are employment, wages,
prices/inflation, interest rates and consumer confidence.

What is consumer confidence?

It is an economic indicator that measures the degree of optimism that consumers have
regarding the overall state of a country’s economy and their own financial situations.

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